Understanding Subcontracting in the Tender Environment

Subcontracting is a common practice in the South African tender environment and plays an important role in helping businesses work together to deliver goods and services on government and private sector contracts. For many small and medium-sized enterprises (SMEs), subcontracting can also be a valuable way to gain experience, build a track record, and participate in larger projects that they may not yet be able to handle on their own.

This article explains what subcontracting is, how it works, and what businesses should know before entering into a subcontracting arrangement.

What is Subcontracting?

Subcontracting happens when the main contractor (also called the principal contractor or lead bidder) appoints another business to perform part of the work required under a tender or contract.

In simple terms:

• The client awards the tender to the main contractor
• The main contractor then appoints one or more subcontractors to assist with certain portions of the work

The subcontractor does not usually have a direct contract with the client. Instead, the subcontractor has a separate agreement with the main contractor.

A Simple Example

A municipality advertises a tender for the construction of a community hall.

A construction company submits the tender and is awarded the contract. However, the company does not perform all the work itself. It appoints:

• An electrical company for wiring and lighting
• A plumbing company for water installations
• A security company for fencing and alarms

These businesses are subcontractors.

The municipality only has a formal contract with the main construction company, not with the subcontractors.

Why is Subcontracting Used?

Subcontracting is widely used because it allows companies to:

Access Specialised Skills

Some contracts require expertise in areas such as electrical work, IT systems, catering, security, engineering, or consulting services.

Increase Capacity

A company may win a large tender but need additional manpower or resources to complete the project.

Promote BBBEE and Supplier Development

Many government tenders encourage or require subcontracting to:

• Black-owned businesses
• SMMEs
• Youth-owned businesses
• Women-owned businesses
• Local suppliers

Reduce Risk

Main contractors may subcontract certain portions to experienced specialists rather than trying to do everything themselves.

Types of Subcontracting

1. Nominated Subcontracting

The client may specify certain subcontractors that must be used for part of the project.

2. Domestic Subcontracting

The main contractor chooses the subcontractors independently.

3. Mandatory Subcontracting

Some tenders require a percentage of the contract value to be subcontracted to designated groups, especially for transformation and empowerment purposes.

For example:

• “The successful bidder must subcontract a minimum of 30% to qualifying SMMEs.”

Subcontracting in Government Tenders

In South Africa, subcontracting in public sector tenders is regulated by several laws and policies, including:

• The Preferential Procurement Policy Framework Act (PPPFA)
• BBBEE legislation
• SCM (Supply Chain Management) policies
• Construction Industry Development Board (CIDB) requirements in construction tenders

Government departments often use subcontracting to promote:

• Economic transformation
• Skills development
• Local economic participation
• Enterprise development

Important Tender Requirements

When subcontracting is allowed or required, tender documents often ask bidders to provide:

• Details of subcontractors
• BBBEE certificates or affidavits
• CIDB grading (where applicable)
• Scope of work to be subcontracted
• Percentage of work allocated
• Signed subcontracting agreements or intent letters

Failure to provide the required subcontracting information may result in disqualification.

Responsibilities of the Main Contractor

Even when work is subcontracted, the main contractor remains responsible for:

• Delivering the project successfully
• Meeting deadlines
• Quality control
• Managing subcontractors
• Ensuring compliance with tender conditions

If a subcontractor performs poorly, the client will usually hold the main contractor accountable.

Responsibilities of the Subcontractor

Subcontractors are expected to:

• Deliver the agreed work professionally
• Meet deadlines and specifications
• Comply with health and safety requirements
• Submit required documentation and invoices
• Maintain good communication with the main contractor

Subcontractors should also ensure they clearly understand:

• Payment terms
• Scope of work
• Penalties
• Contract duration
• Reporting lines

Advantages of Subcontracting

For Main Contractors

• Access to specialist expertise
• Ability to handle larger projects
• Improved capacity and flexibility
• Compliance with subcontracting requirements

For Subcontractors

• Opportunity to participate in larger contracts
• Build experience and references
• Generate revenue without managing the full contract
• Develop relationships with established companies

Risks and Challenges

While subcontracting has many benefits, there are also risks.

Late Payments

Subcontractors sometimes experience payment delays if the main contractor is not paid by the client.

Poor Communication

Misunderstandings about scope, timelines, or responsibilities can create disputes.

Overdependence

Some subcontractors become too reliant on one contractor for work.

Fronting Risks

Illegal “fronting” practices occur when companies pretend to subcontract for BBBEE compliance but do not provide meaningful participation. This is prohibited under South African law.

Best Practices for Subcontracting

Businesses involved in subcontracting should:

Use Written Agreements

Always have a clear subcontracting agreement in place.

Define the Scope Clearly

Specify exactly what work will be done and by whom.

Verify Compliance

Ensure all parties meet tender and legal requirements.

Keep Records

Maintain copies of agreements, invoices, correspondence, and proof of work completed.

Build Relationships

Good subcontracting relationships can lead to long-term business opportunities.

Can Small Businesses Benefit from Subcontracting?

Absolutely.

For many small businesses, subcontracting is one of the best ways to enter the tender market. It allows smaller companies to:

• Gain practical experience
• Learn how projects are managed
• Develop a track record
• Improve credibility
• Grow gradually without taking on excessive risk

Many successful contractors started as subcontractors before bidding for their own large tenders.

Final Thoughts

Subcontracting is an important part of the South African tender environment and helps businesses collaborate to deliver successful projects. It creates opportunities for skills sharing, business growth, transformation, and participation in larger contracts.

Whether you are a main contractor or a small business looking to become a subcontractor, understanding how subcontracting works can help you participate more effectively in the tender process and avoid unnecessary risks.

With proper planning, clear agreements, and good communication, subcontracting can be beneficial for all parties involved.

1. This is not a legal opinion and must not be interpreted as such.

To learn more about this and other tender conditions attend our “Become a Tender Expert” 2-Day webinars online or live workshops presented in Johannesburg and various other cities throughout South Africa. Book and pay online at https://howtotender.co.za/workshops/#comprehensive

Contact us at wernervr@howtotender.co.za should you require more information.

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